Burned by solar

The solar energy sector in Germany, which pioneered hefty government subsidies to stoke the industry and create jobs, is going dark, leading many to wonder if Ontario should continue to follow the same model.

The Ontario government is expected to slash subsidies offered for renewable energy projects through a feed-in-tarrif (FIT) as early as Friday morning, but big questions still remain about its overall green energy strategy.

China’s entry into the green energy market has dramatically lowered the cost of developing solar power projects, leading to widespread layoffs and major bankruptcies of solar manufacturers around the world, including Berlin-based Solon SE in Germany which filed for insolvency on Tuesday and California’s Solyndra LLC this summer. Meanwhile decade-old FIT prices have fallen below retail prices.

“This sets up an interesting long-term question for Ontario,” said Alex Wood, senior director of policy and markets for the Ottawa-based think tank Sustainable Prosperity. Will the FIT program’s promise of long-term benefit be enough to outweigh the short-term cost?

Arguments such as those raised by provincial Auditor General Jim McCarter’s annual report issued last week, say the answer is no. Industry executives, meanwhile, allege the consequences of cancelling a program upon which so many companies have come to rely, would be far worse and besides, Ontario can learn from mistakes made elsewhere.

Creating 50,000 new jobs was among the most-touted benefits of FIT when the Liberal Party introduced it in 2009, though Mr. McCarter’s Dec. 5 report noted about 30,000 of them will be temporary construction positions.

“Studies in other jurisdictions have shown that for each job created through renewable energy programs, about two to four jobs are often lost in other sectors of the economy because of higher electricity prices,” he added.

The report also criticized the government’s landmark $7-billion deal with Samsung Electronics Corp. to build out 2,500 megawatts of wind and solar power, saying it was “rushed” and “not supported by a business case.”

Complicating that deal is the FIT program’s domestic content requirements, for which Samsung is building four massive facilities in Ontario to meet. Because any made-in-Ontario terms may violate international trade laws, as Japan and other countries have claimed, their ongoing inclusion in FIT and Samsung’s need to build Ontario factories, is far from a guarantee.

Queen’s Park never did a cost-benefit analysis on the program, argues Andrew Leach, leading to its present conundrum. Ontario focused on questions such as “how much do we need to pay?” instead of “does it make sense to pay this much?,” said the professor of environmental and energy economics at the University of Alberta School of Business. “There are simple questions they need to be asking.”

Ben Dachis, policy analyst with C.D. Howe Institute, said Germany is just the latest in a series of many wake up calls about the very expensive nature of the programs and the unsustainable nature of the feed-in-tariff program.

“These sort of industries built around subsidies are not sustainable — when the company lives by the subsidy they also die by the subsidy — so here in Ontario we need to get out of the subsidy business for electricity as soon as we can.”

Still, Mr. Leach warned that now Ontario has artificially established a domestic solar industry, “if that support goes away, your industry goes away.”

That leaves Queen’s Park with a difficult choice to make: Should Ontario continue offering expensive incentives to keep projects flowing, or does it drop FIT rates closer to retail prices and risk “gutting” the industry as Mr. Wood warns it will?

“Luckily, it is a risk that Ontario controls,” said Mr. Leach. “It is not something where the market will determine if Ontario falls off a cliff, it is Ontario that will determine whether its solar industry falls off a cliff.”

Ontario should be able to learn from mistakes made in Germany and elsewhere, said Martin Baldwin, chief financial officer of Toronto-based Atlantic Wind & Solar Inc., among the country’s largest renewable energy firms.

“Germany is the forerunner and is considered the template so everybody says what happens there from a governmental perspective will happen here – that doesn’t necessarily mean it will happen here from a business perspective, though that assumes we can learn from someone else’s history.”

Bureaucratic delays have already pushed Ontario’s sector to a precipice. Of more than 1,200 applications for ground-mounted solar stations received as of Dec. 9, for example, just five have made it to the review stage.

Mr. Baldwin, believes there is “not a fraction of 1% chance” the OPA will very drastically cut rates, as the United Kingdom recently did to its own program. But with component prices falling faster than anyone could have predicted just two years ago, he said, the market remains frozen in a state of anxious anticipation.

“Nobody spends anything in a falling rate environment [due to] fears of deflation and stagflation,” he said. “That is why we’ve been looking at this day [Dec. 16] the way kids look at Christmas.”